Termination rates are the wholesale tariffs charged by the operator of a
customer receiving a phone call, to a fixed or mobile phone, to the operator of
the caller's network for connecting, or "terminating", the call. Termination
rates are therefore part of the cost of a call between customers of different
network operators and included in the phone bill of the calling customer.

How much does terminating a call cost today?

Termination rates are applied by both fixed and mobile operators for
connecting calls on their networks. Although termination rates are regulated in
all Member States, the level of these rates diverges widely across the EU.
Average mobile termination rates, for example, varied from 2 euro cents/min in
Cyprus and 5 euro cents/min in Finland to 8 euro cents/min in Germany and over
15 euro cents/min in Bulgaria in 2008. Mobile termination rates are still around
10 times higher than fixed-line termination rates which ranged on average from
0.57 euro cents/min to 1.13 euro cents/min over the same time period. The extent
of these variations cannot be justified solely by differences in the underlying
costs, networks or national characteristics.

Why should termination rates be regulated?

At the current stage of technological development, fixed or mobile phone
calls to a subscriber can only be terminated by the operator of the network to
which that particular customer is connected. This creates a 'monopoly' situation
for each network operator on their own network resulting in distortions of
competition, such as excessive pricing. Regulating termination rates therefore
addresses the risk of excessive pricing by ensuring that the prices reflect the
underlying costs of terminating the call.

Who regulates termination rates?

The regulation of termination rates in each Member State is the
responsibility of the national telecoms regulators. Under EU telecoms rules,
when a national telecoms regulator determines that a relevant market is not
effectively competitive, it must identify operators with significant market
power and impose appropriate obligations on them to encourage competition (MEMO/08/620).
National regulators are then required to notify the Commission and the other EU
Member States' regulators of their draft decision(s) to ensure consistent
regulatory practice across the EU and legal certainty for market players (the
so-called Article
7 procedure). Having received a considerable number of such notifications
from national regulators under this consultation mechanism, the Commission has
consistently stated that regulated termination rates should be set on the basis
of the costs of an efficient operator. This would ensure a level playing field
amongst different operators and give operators incentives to become efficient
and bring benefits to consumers, in particular lower prices.

Why is the Commission now intervening in the way national authorities
regulate termination rates?

While termination rates are on a downward trend as a result of regulatory
intervention, they remain too high, particularly for calls to mobile phones. In
addition, termination rates are set at disparate levels across different Member
States. Such diverging levels cannot be solely explained by differences in the
underlying costs or national specificities but are in large part driven by
inconsistent approaches to the regulation of termination rates.

This inconsistent regulation:

hampers the consolidation of a single borderless market in the EU

hinders the evolution of cross-border competition and services

tilts the playing field in favour of larger, more established mobile
operators to the detriment of smaller entrant mobile operators with large
traffic outflows to other networks

impedes investment in next generation networks and the development of
fixed-mobile convergent services and

ultimately leads to higher phone tariffs for business and household
customers.

This is why the Commission has issued a Recommendation on
the regulatory treatment of termination rates, providing clear principles for
national regulators to set a fair cost. Consistent regulation across the EU will
provide legal certainty and a level playing field for telecoms operators. This
will lead to more investment, innovation and competition in the telecoms sector
benefiting Europe's 500 million consumers.

What does the Recommendation require from national telecoms
regulators?

The Recommendation states that national telecoms regulators should set
termination rates at the level of what it costs an efficient operator to
"terminate" calls on his network. It provides a methodology for calculating a
termination rate that allows an operator to recover all of the relevant costs
efficiently incurred when providing call termination services to third parties.
This methodology leads to termination rates which would prevail in a competitive
market and thereby eliminates to a large extent currently existing distortions
of competition, such as excessive pricing, resulting from the 'monopoly'
situation characterising termination markets in Europe.

National telecoms regulators are obliged to take "utmost account" of the
Recommendation which stipulates that the recommended costing methodology should
be implemented by the end of 2012.

However, the Commission recognises that some less well-resourced national
telecoms regulators might need an additional transition period to prepare the
recommended cost model. Therefore, in exceptional circumstances, national
telecoms regulators may use alternative approaches until 1 July 2014 if these
methods result in an outcome consistent with the Recommendation and with that of
a competitive market. Alternative approaches beyond this date can only be
applied where cooperation among EU regulators would not be sufficient to offset
this lack of resources and it would be objectively disproportionate for such
regulators to apply the recommended model.

Are there any countries already complying with the rules recommended by
the Commission?

In October 2008, the French telecoms regulator, ARCEP decided to bring mobile
termination rates closer to the cost of an efficient operator. The Commission
welcomed the proposal noting that ARCEP's approach clearly represents best
European practice and very important efforts to bring mobile regulation in line
with the Commission Recommendation on the regulatory treatment of termination
rates. ARCEP indicated in this context that the efficient cost-based mobile
termination rate to be reached by all mobile operators would be between 1 euro
cent and 2 euro cent per minute (IP/08/1810).
The Commission also welcomed the Italian and the Romanian regulators' commitment
to bring termination regulation in line with European law and best European
practice and their firm intention to develop a cost model in line with the
Recommendation (MEMO/08/708,
IP/09/357).

At the same time, the Commission has recently called on the Bulgarian
regulator, for example, to introduce a faster reduction of mobile termination
rates reiterating that in 2008, mobile termination rates in Bulgaria were, with
over 15 euro cents per minute, the highest in the EU (IP/09/166).
The Commission has also urged the Spanish regulatory authority to take further
necessary steps to reduce termination rates to a cost-oriented level reflecting
the cost of an efficient operator, while the German regulator even had to be
asked to notify the Commission of the actual mobile termination rates as they
represent an important part of the price remedy and play a key role in ensuring
effective competition in the EU telecoms market (IP/08/1860).

In the Commission's view, how low should mobile termination rates
be?

The Commission’s Recommendation aims first and foremost at greater
consistency and more effective regulation of termination rates. The objective is
not to regulate down to a particular level. Of course, considering that mobile
termination rates are on average nine to ten times higher than average fixed
termination rates, there is scope for significant reductions of mobile
termination rates from current levels. Regulating termination rates on the basis
of efficient costs will result in substantial reductions over the next three
years, depending of course on the extent to which termination rates currently
exceed efficient cost in each Member State and could lay in the range of 1.5 to
3 euro cents per minute.

What will be the impact of the expected reductions in termination rates on
industry?

The proposed approach will lead to more substantial reductions in termination
rates than previously seen in the EU. However, operators will still be able to
recover their costs for "terminating" calls. Operators in countries that already
have very low termination rates are still able to recover their costs, generate
substantial revenues and compete effectively.

A Commission Staff Working Paper explores the likely implications of the
recommended approach for competition, industry players and consumers in detail.
On the basis of the short-term static assessment alone (where all other factors
are fixed over time), a potential reduction in mobile industry cash
flows/profits of around €4 billion is estimated over the next three years
as regulators move towards the recommended approach.

At the same time this loss is offset with estimates predicting additional
revenues for fixed operators of at least €2 billion over the next three
years as well as €2 billion of additional consumer benefits. The static
model developed by the Commission cannot reliably capture all of the dynamic
effects of enhanced competition (including the possibility for new revenues from
other services) which will extend over the mid-to-longer term and will be even
more positive than estimated by the short-term model. Indeed, more competition
delivers increased incentives for efficiency and innovation that will encourage
customers to use their phones more and will promote previously unexploited
revenue opportunities for operators in the EU. While more difficult to predict
in the mid-to-long-term, the overall gain to society as a whole resulting from
the combined effect on consumers and market players will be much greater than
shown by the static model alone.

Will the Commission's Recommendation be good for competition and
consumers?

The proposed common approach to the regulation of termination rates in the EU
will promote competition by bringing greater legal certainty to operators that
want to operate and invest on a cross-border basis.

Regulating termination rates based on the costs of an efficient operator
should reduce cross subsidies from fixed to mobile operators and minimise the
financial impact of traffic imbalances between smaller and larger networks,
while still allowing all operators to cover the cost of terminating calls. This
will ensure a more equitable allocation of financial resources across the EU
telecoms markets, will create a level playing field for operators and provide
appropriate investment incentives. In particular, the expected enhanced
competition between operators should help encourage important network and
service innovations such as fibre roll-out and the development of bundled
offerings or converged services and provide faster and more efficient services
and products to consumers at better prices, especially by smaller mobile phone
operators as well as fixed network operators.

As to consumer benefits, it is likely that the regulation of termination
rates on the basis of the costs of an efficient operator will result in lower
phone bills for consumers. Some price restructuring may of course occur, but
enhanced competition will help secure a continued downward trend in retail
prices and affordable mobile phone usage across the EU, helping to avoid even
low-spending consumers from giving up their mobile phone connections or
subscriptions. Indeed, some late-entrant mobile operators have indicated that
they are ready to receive the 40 million customers that European incumbent
operators claim they would no longer be able to serve under the recommended
costing approach.

Could the Recommendation lead to a situation where Europe's consumers,
like in the US, will have to pay for receiving telephone calls?

This is highly unlikely. The Commission's Recommendation only aims to set out
clear consistent costing principles on the regulatory treatment of termination
rates in the EU. The choice of business model for the exchange of termination
traffic and for retail pricing remains a matter for the operators to decide by
themselves. The Commission Recommendation does not preclude alternative
mechanisms from evolving in the future as long as they are consistent with a
competitive outcome and the interests of consumers. "The calling party pays"
principle is firmly anchored in the mentality and consumer behaviour of
Europeans. A company changing this would therefore risk losing its customers to
its competitors. The bottom line is, whatever system evolves as a result of
lower mobile termination rates, consumers in Europe will be substantially better
off than today. This explains why the European Consumer Association BEUC
supports the Commission's Recommendation on Termination Rates.